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Treasure in a VAT?

With the U.S. federal deficit mounting and budget demands soaring to fund wars, healthcare, education and retirement benefits, there's growing pressure to find new sources of government revenue. One that's perennially raised is the value-added tax or VAT--a tax levied on goods at every stage of production.

With the economy on the skids, it's unlikely we'll see a U.S. VAT anytime soon. But given that almost every other country has one (not having one puts the U.S. in the company of Greenland and Middle Eastern countries), a U.S. VAT seems likely someday. If so, what would it mean for businesses?

Peter Merrill, director of the national statistics group at PricewaterhouseCoopers, says it might not be that big a challenge for large multinationals. After all, he notes, they are dealing with a VAT in almost every other country they operate in.

That said, Merrill notes that switching to a VAT can be a "wrenching experience akin to a root canal," as Canadian businesses and politicians learned in 1993.

Among the challenges is the fact that record-keeping for a VAT, unlike a tax on profits, involves almost every part of an enterprise. "If someone in shipping messes up a label, for example, it becomes a VAT problem, not just a delivery problem," Merrill says. ERP systems would need to be reworked because they aren't programmed for a VAT, as would invoicing systems.

The complications go beyond that. In Canada, as in the U.S., most jurisdictions have sales taxes. Companies discovered their tax staffs, which knew how to handle sales taxes, couldn't always make the shift to working with VAT, Merrill says, "so it becomes an HR problem, too."

Then there is fraud, and penalties for mistakes as small as a slip-up on an invoice. "VAT requires a gigantic amount of data management," Merrill says, "because contrary to what many people think, VAT offers enormous opportunities for fraud."

Not surprisingly, U.S. businesses generally oppose a VAT. As someone familiar with finance executives' thinking says, "A VAT is really going to hit the consumer, and that worries most companies."

But Eric Toder of the Urban Institute notes that if government is going to fund the services citizens want, consumers will be hit with higher taxes. "I think after people go through all the options six or 10 times, they'll end up coming back to this."

As to how well the adoption process would go, Merrill quotes Columbia University law professor Michael Graetz: "Sri Lanka was able to establish a VAT in the midst of a civil war. I think we can handle it here."

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